Professor Wieland, inflation rates in Germany and in the Eurozone as a whole are falling. Is it time to declare the problem of inflation over?
No. The issue is not settled. But of course we are all pleased that inflation has now fallen.
Why would one be suspicious of this decline?
I wouldn't trust the decline, it's backed by data. The inflation rate in the euro area has fallen from more than 10 percent in autumn 2022 to 2.8 percent most recently, and that in Germany to 2.9 percent. But it is still unclear how sustainable this decline is and whether it may only be temporary. Energy prices play a central role in this decline, fluctuating sometimes in one direction and sometimes in the other. Therefore, measures of inflation that are less dependent on energy provide a better picture of how sustainable the decline is. If you exclude energy prices, the increase in consumer prices in January was still 3.8 percent. And the inflation of all domestically produced products and services provided, measured by the GDP deflator, was most recently more than 5 percent in the third quarter of 2023. If you exclude energy prices or import prices in general, the decline in inflation has not yet been that strong.
How seriously should we take the plea of some ECB Council members that there could still be setbacks?
I think this should be taken very seriously. I compared how quickly inflation rose and fell in the major euro area member states and the United States now and back in the 1970s after the oil price shock. The speed was very similar. And back then, the first decline in inflation was followed by a rebound to a second high – not least because of the subsequent wage increases.
Is inflation likely to rise again? Everything points in the other direction. . .
I think it is at least a risky scenario, even if not the most likely development. In fact, there is much to suggest that inflation rates will decline with fluctuations over the course of the year. But after reacting too late to the rise in inflation, central bankers now want to avoid a return of inflation at all costs. I think it's right. Especially since the more persistent, sustainable components of inflation have not yet fallen that much. This suggests we should wait and see what happens next.
Can the reverse also happen, with the inflation rate falling surprisingly quickly below the ECB's target of 2 percent? Does the central bank then have to react hastily?
Of course, the ECB should not miss the right time to cut interest rates as long as it did to raise interest rates at the beginning of the inflation phase. But I think that's a minor problem at the moment. After all, the nominal interest rate on the money market is just under 4 percent, only slightly above the current inflation rate. The real interest rate – that is, corrected for inflation – is still low. And that is crucial for how much the central bank curbs demand. If inflation rates actually continue to decline as currently forecast, the time for a rate cut would certainly come in the summer. And if, contrary to expectations, they decline much faster, the ECB could still react earlier.
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